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Economists may not see eye to eye on much, but over the years I’ve found a few core concepts on which all but the most politically motivated would agree.
One is that inflation is a monetary phenomenon – “always and everywhere,” to quote the late Nobel laureate Milton Friedman. Another is that there is no long-term trade-off between inflation and unemployment, a relationship expressed by the Phillips Curve.
Friedman, again, along with fellow Nobel laureate Edmund Phelps, argued that any attempt to push employment below a so- called “natural rate” would backfire when workers realized the higher wages offered them were a “money illusion” and prices were rising even faster. Their augmented Phillips Curve became the accepted way to explain the coexistence of high inflation and high unemployment in the 1970s.
So why would the Federal Reserve be willing to risk higher inflation for, at best, a short-run boost to employment? The simple answer is that some policymakers don’t see it as a risk. Today’s 9.1 percent unemployment rate is well-above what’s considered full employment in the U.S., giving the Fed leeway to advance one of its dual mandates (maximum employment) without compromising the other (stable prices).
Fed governors Daniel Tarullo and Janet Yellen are already on record as ready or willing to expand the Fed’s $2.86 trillion balance sheet. And if they can help the housing market in the process – print money to buy mortgage-backed securities – so much the better!
Not everyone is so sanguine about further stimulus. Three Fed District Bank presidents dissented at the last two meetings, opposing August’s pledge to keep the funds rate near zero through mid-2013 and the decision in September to extend the maturity of the Fed’s securities portfolio.
Members of the Shadow Open Market Committee, a group of independent economists who meet twice a year to evaluate the Fed’s policy choices, are similarly inclined.
Tarullo and Yellen, as mentioned above, are in the “risk” camp. They look at measures of excess slack in the economy – things like the rates of unemployment and capacity utilization – and conclude there’s room for further stimulus. Curiously, the quasi-monetarists, who advocate maintaining a constant level of nominal gross domestic product, think the Fed should embark on additional asset purchases as well.